Carso Energy, Energy Transfer Partners and MasTec reached financial close on a $1.38 billion financing for their Waha-Presidio and Waha-San Elizario pipelines on 17 November. On one level, the deal was fairly humdrum: Mexico has procured and continues to procure many such pipelines in order to bring gas to its power stations, and in technical terms the projects presented no great challenges. Nonetheless, the demands of the financing and the fact that it was delivered so quickly and with such keen terms may set a new benchmark for recent pipeline financings.

Size matters

The Waha pipelines are among five projects unveiled by Mexico’s Federal Electricity Commission, CFE, in April 2014. Unlike some of the projects, they do not actually enter Mexican territory, running through Texas and ending at the border. But together, they account for over half the total estimated cost of the deals at initial announcement. By comparison, the debt and equity requirement for the El Elcino-La Laguna pipeline financed in July was $820 million, and the Roadrunner pipeline in Texas required only $230 million of debt when it closed in September.

In addition, the sponsors targeted a relatively aggressive gearing of 85:15 for the Waha pipelines (see table below). The debt requirement, at $1.1 billion, was thus unusually large. Although the two pipelines were awarded to the sponsors separately (in September 2014) and the financing is documented separately, financing was raised simultaneously and from identical lending groups.

A further potential challenge in raising debt was the sponsors’ keenness to secure a long-term financing and eliminate refinancing risk. Other CFE pipeline deals, such as El Encino-La Laguna, have closed with a mini-perm. In that case, pricing was key to the choice. As well as potentially making pricing expensive, a long-term financing would exclude banks whose mandate did not accommodate it.

Bookbuilding

Into this large deal a large group of bookrunners emerged. The sponsors initially began with two underwriting banks, who then brought in a third and then a fourth to structure the deal. The coordinating lead arrangers were formally appointed in May 2015. BBVA was joined by technical bank Mizuho, documentation bank MUFG and modelling bank SMBC.

The bookrunners fully underwrote the debt requirement – initially sized at around $900 million but then growing to $1.1 billion – and launched syndication around the end of September, signing the debt less than two months later. They took $685 million of the debt in varying amounts, with lead arrangers Caixabank, ING, Intesa, Korea Development Bank and Banco Sabadell taking about $475 million.

Take and hold

The term debt on the Waha pipelines has a maturity of 20 years, comprising two years’ construction and 18 years of repayments, and is fully amortising. Another big gas pipeline project for Mexico financed in the past year, Los Ramones Sur, also closed with a 20-year maturity, but with pricing step-ups totalling 100bps. The Waha pipelines step up to 275bps after 15 years (after stepping up to 225 and 250bps at semi-regular intervals) to cover the cost of capital, and there is no cash sweep. Banks have therefore had to have a 20-year take and hold view on the debt, and bookrunners took underwriting risk on the full amount before financial close.

The Waha pipelines are perceived as a strategic asset, in particular the Waha-Presidio or Trans-Pecos pipeline which includes the Waha Hub gas header, a gas gathering system. The two pipelines only use 2.5 billion cubic feet out of the header’s 6 billion cubic feet capacity, about 40%, leaving scope for considerable expansion projects later.

The pipelines are also strategic in another sense. CFE’s long term policy is to bring down the cost of power generation in Mexico, and cheap gas from the US is key to this. The pipelines each have separate 25-year transportation service agreements with CFE.

Despite the long tenor and lack of an obvious refinancing story, pricing is competitive, starting at 200bps, only 15bps higher than the initial pricing on the 3.5 year mini-perm El Encino-Las Lagunas pipeline, and 50bps lower than Los Ramones Sur. The sponsor’s track record, particular Energy Transfer Partners’ and MasTec’s enginnering background, was cited as an important factor.

Daniel Michalchuk, partner at Milbank, Tweed,Hadley & McCloy, who advised the lenders, hails the efficiency of execution in the six-month financing. “These were two deals – they just happened to have closed and been documented concurrently,” he says, adding: “You had very diverse sponsors working closely in a group to close two parallel financings. That’s a great deal and I’m sure other people will learn from it.”

Advisers

Shearman and Sterling was legal adviser to the sponsors, while Milbank, Tweed, Hadley & McCloy was legal adviser to the lenders. Lummus was technical adviser to the lenders.